China long on reform but short on policy

Economists argue it is too early to write off the outcome of China’s third plenum and its impact may still be transformative.
Photo: Reuters

by
Vesna Poljak

China’s third plenum has failed to inspire economists but has not shaken faith in the expectations for growth in the world’s second-biggest economy next year.

The event’s conclusion left a long list of reforms unanswered, specifically those related to state-owned enterprises and land ownership.

That’s partly because the hype ­surrounding the high-profile Communist Party meeting prompted a list of ideas that experts say were unreasonably demanding, given China’s ­tendency to move policy in increments.

The past four days will set the policy agenda for China for the next 10 years.

AFR
AFR

Shares in Asia traded lower on Wednesday as investors took few leads from the official communique from Beijing.

An outline of more detailed reform targets will be released possibly as soon as the next week.

Early days

The Hang Seng was down 1.5 per cent and shares in Shanghai were down 1.2 per cent. The S&P/ASX 200 Index closed 1.4 per cent lower to 5319.2.

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HSBC’s Hong Kong-based co-head of Asian economic research, Fred ­Neumann, argued it was too early to write off the outcome of the third ­plenum, and its impact may still be transformative.

“To be honest, I think there has been too much expectation placed on this particular meeting," he said.

“It’s too early to conclude that it’s been a failure or indeed a success."

Mr Neumann is encouraged by a move to set up a committee to oversee the implementation of reforms, which will take power away from the National Development and Reform Commission.

HSBC highlighted the lack of detail and “quantifiable indicators" as the immediate disappointments, alongside the omission of any state-owned enterprise and land reforms.

But the bank found nothing to rule out China delivering sustainable annual growth of 7 per cent to 8 per cent for the “coming years".

“This was supposed to be the key meeting that changes everything and it may well have been. But we won’t really know until the coming two years say whether there has been a change in direction," Mr Neumann said.

Divergent outcomes

He pointed to previous plenums as evidence of the divergent outcomes ­Beijing could take away from this year’s event.

“[In] 1993, they introduced the term socialist market economy and they hinted at the fact they wanted to reform state-owned enterprises. And, eventually, they did so in the late 1990s and that was one of the key reforms that got China on a strong path in the 2000s but it took a while for that to see the light of day," he said.

“Then, in 2003, they had an equally ambitious platform but it was never implemented. So sometimes these bold reform plans see the light of day, sometimes they don’t."

Nomura economists took the view the emphasis on markets could pave the way for further liberalisation, including that of the currency.

The party language referred to the market playing a “decisive" role in resource allocation, according to Nomura, which may allude to more efficient allocation of capital and credit.

Nomura sees China’s economy expanding at 6.9 per cent in 2014.

Westpac highlighted the communique referred to the role of the market as “decisive", in effect an upgrade from its previous characterisation as “basic".

“With this single statement, the leadership has signalled that the market is the new arbiter of resource allocation," Westpac economists said.

The bank added there would be no doubt as to the intentions of the current crop of leaders and their motivation to bolster China.

“Cadres at all levels cannot be ­confused about the resolve of the leadership to execute on their vows."

Mr Neumann believes the current leadership is well-placed to deliver.

“I think these guys are real, I think they will push ahead with reform; they have no choice, in fact."

The nature of Chinese policy ­development is that “they have to hint at some of the changes but fill in the details later, that’s just political reality in China", Mr Neumann said.